Two New Perspectives from FSF Scholars!

This week, the Free State Foundation published two Perspectives from FSF Scholars. President Randolph May and Visiting Fellow Gregory Vogt coauthored a paper entitled "It’s Time for U.S. Leadership Regarding Zero-Rating and Similar Programs." This Perspectives discusses how zero-rated services can expand broadband access around the world and why a hands off approach from the FCC regarding zero-rated services could influence foreign governments to do the same.

In a different Perspectives from FSF Scholars entitled "Video Report Data Undermine the FCC’s Rationale for New Device Regulation," Senior Fellow Seth Cooper points out the inconsistencies between the FCC's Seventeenth Video Competition Report and its February 2016 proposed set-top box rulemaking. 

It's Time for the FCC to Recognize OVDs and MVPDs Are Substitutable

Stock prices have fallen recently for some of the largest video content companies, including Disney, Viacom, CBS, and 21^st Century Fox – primarily a response to multichannel video programming distributors (MVPDs) losing 566,000 subscribers in the second quarter of 2015. This is a sign that MVPDs most likely will need to transform their programming packages in order to compete with the emerging success of online video distributors (OVDs).

For many young Americans, OVDs (such as Netflix, Hulu, or Amazon Prime) have become substitutes for the services of MVPDs. In fact, roughly 1.4 million Americans “cut the cord” in 2014 and now view content strictly through OVDs. (That number is likely to increase in 2015.) While the availability of live sports programming has been a reason for some consumers to keep an MVPD subscription, even ESPN has lost 3.2 million subscribers in just over 12 months. Despite the obvious signs of this inevitable technology transition, the Commission says it does “not have evidence” that OVDs and MVPDs are substitutes, according to the July 2015 AT&T-DIRECTV order. 

The Commission seems puzzled about the relationship between OVDs and MVPDs. It stated the following in the AT&T-DIRECTV order:

“[F]or most consumers today, OVD services are not substitutes for MVPD services. Rather, as we note in our description of current industry conditions discussed above, OVDs typically offer consumers choices that may either complement their MVPD services or compete with some portion of the services MVPDs offer, such as VOD. Indeed, despite the increased number of OVDs and increased use by consumers of OVD services, we do not have evidence on the record that any OVD would be, in the near term, a disciplining force if the combined entity were to increase price or decrease quality. However, given the development of additional and new OVD services and the proliferation of new technologies and devices that allow consumers to view video programming sold by OVDs on their computers, phones, and televisions, we acknowledge that OVDs have the potential to become substitutes for MVPD services with a market presence that is sufficient to counter effectively an increase in price or decrease in quality by the combined entity.”

It is important for the Commission to recognize OVDs and MVPDs as substitutable during its “Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming.” If the Commission continues to see the two as complements, rather than substitutes, its analysis regarding market concentration and video competition will not be accurate when considering policy implications or assessing future merger proposals.

Switching Off an Outdated Cable Rule: End the Costly Integration Ban

In an op-ed for The Washington Times published on May 15, House Communications Subcommittee Vice Chairman Bob Latta, R-Ohio, and Republican Federal Communications Commission Commissioner Ajit Pai jointly advocated an end to the integration ban. In the piece, Vice Chairman Latta and Commissioner Pai educated readers on what the integration ban is, why it was implemented, and how it negatively affects the video marketplace, as well as consumers’ cable and energy bills. It is important that other members of Congress, the Commission, and the public understand the harms caused by the integration ban and that all parties work toward removing the integration ban and other unnecessary and burdensome video regulations. 

As Vice Chairman Latta and Commissioner Pai reported in their piece, the integration ban is an FCC-implemented technological mandate that is not required by the Communications Act. It requires cable companies to use a CableCARD or other technology to perform the security function of a set-top box. However, the CableCARD is not necessary because set-top boxes and other navigation devices – mobile applications, tablets, computers, and gaming consoles – can perform the security and navigation functions without the CableCARD. The reason the FCC instituted the integration ban was to help third-party retailers compete with cable companies in the set-top box market. But the mandated integration ban, and specifically the CableCARD regime, clearly have not accomplished this goal.

In addition to being technologically and statutorily unnecessary, the integration ban adds about $56 to the cost of each set-top box, increasing the monthly rental fees charged to customers. Additionally, CableCARDs increase cable customers’ energy consumption by 500 million kilowatt hours each year, enough to power all the homes in Washington, D.C. for about three months according to the Environmental Protection Agency. Despite the incurrence of these costs, only 606,000 CableCARDs have been deployed for use in third-party retail devices. In other words, less than 1.4 percent of customers are choosing to purchase their set-top boxes through the retail market despite the FCC’s attempts to push consumers that direction. In contrast, cable companies have supplied 45 million of their own CableCARD-enabled set-top boxes to their customers.

And the video marketplace has developed in ways that offer consumers many choices in how and when to access video content, many of which bypass the CableCARD mandate. Major providers like Comcast, Time Warner Cable, and Cox are among those that have made their services available through these new platforms and devices. Additionally, various online video providers including Netflix and Hulu and other set-top box, IP, and cloud-based technologies have all experienced major growth in recent years. All this in spite of not because of the Commission’s integration ban as I explained in a February 2014 Perspectives from FSF Scholars.

Many cable subscribers are likely unaware of this technological mandate and its effects on their cable bills. But Free State Foundation scholars have been focused on reforming consumer-harming video device regulations for years. For example, in an October 2010 piece FSF Adjunct Scholar Seth Cooper urged the Commission to eliminate the integration ban and to employ the sunset provision contained in Section 629 according to which, the FCC shall cease to apply regulations when it finds the multichannel video programming and video navigation device markets are fully competitive and the public interest favors eliminating such regulations. Even nearly five years ago, the rapid growth of DBS, telco video services, video gaming devices, broadband-enabled smartphones, and PCs with broadband Internet showed that the video market was highly competitive. FSF scholars have frequently echoed the need to remove legacy video device regulations in other Perspectives as new developments continue to render technological mandates and regulatory intervention increasingly unnecessary and improper. And in March of this year, FSF reiterated the competitive state of the video marketplace and proposals to reform outdated regulations in comments to the FCC.

Thankfully, Vice Chairman Latta has been focused on this important issue as well. In September 2013, he introduced legislation that would remove the costly integration ban. That legislation has since been included in one Satellite Television Extension and Localism Act bill, HR-4572, which cleared the Commerce Subcommittee on Communications and Technology in March 2014. At the Free State Foundation’s October 2013 seminar, Vice Chairman Latta delivered a keynote address explaining that Congress cannot keep up with the rapidly changing video marketplace. He enumerated the harms the integration ban causes and provided reasons why eliminating the ban and reforming other outdated regulations of the video market would benefit competition and consumers.

Hopefully, Vice Chairman Latta and Commissioner Pai’s piece will spur Congress and the Commission to implement long-overdue reforms of video regulations. The authors concisely explained the clear reasons why now is the time to remove the costly integration ban:

By ending the integration ban, we can kill two birds with one stone. We will take a step toward reducing consumers’ cable and energy bills. We will recognize the marketplace as it is today, not how the government theorized and planned it to be more than a decade ago. That’s something that everyone in Washington should support.

The TWC - CBS 'Retrans' Fight: Moving from Short Term Pain to Long Term Consumer Gain

As the dispute between Time Warner Cable and CBS drags on, obviously there is some pain being experienced by TWC's consumers as they are deprived of access to CBS content.

This "pain" is exacerbated by CBS's decision to block access by all Time Warner Cable broadband customers to the video programming available on CBS's Internet site. In a novel twist, this Internet blocking even affects TWC's broadband customers who do not subscribe to TWC's cable programming.

I am not a supporter of the FCC's net neutrality rules. In any event, by their own terms these regulations don't apply to blocking actions by Internet content providers such as CBS, only to the broadband Internet providers. Do not misunderstand. I am not suggesting any regulatory remedy here for CBS's blocking action. Aside from anything else, I believe that CBS – just like the broadband providers themselves – has a First Amendment right to grant or not grant access to its content. Nevertheless, if nothing else, CBS's action does illustrate the radical transformation the communications marketplace has undergone since Congress adopted the "must carry-retransmission regime" in the Cable Television Act of 1992.

Indeed, such a radical transformation that the Internet, as we know it today, was just a gleam in Al Gore's eye in 1992, along with a few other far-sighted technologically-savvy cognoscenti. Of course, today, as the FCC itself just recognized in its Fifteenth Video Competition Report, online ("over-the-top") Internet video is becoming increasingly prevalent, and, hence, an increasingly potent source of competition across the video marketplace. For lots of facts and figures concerning competition in the video marketplace, see the blog, "FCC Report Reconfirms the Reality of Video Market's Competitiveness," by Seth Cooper, my FSF colleague.

I can actually remember much of the debate surrounding adoption of the 1992 Cable Act. As anyone else who was around then knows, or who simply researches the legislative history, the principal justification for the must carry-retransmission regime (the two were linked together) was the presumed need at the time to protect local broadcasters and the local broadcast signal. Indeed, even a cursory reading of the Supreme Court's 5-4 decision in Turner Broadcasting System v. FCC will show that, but for the Court's acceptance of the argument that Congress intended to protect the signals of local broadcast stations from what the Court then called cable's "bottleneck" power, the must carry regime would have been declared inconsistent with Turner's First Amendment rights.

With the principal justification for the must carry-retransmission regime the protection of the viability of local broadcast stations, it is somewhat odd that the current TWC-CBS "retrans" battle, along with other present-day similar ones, reportedly turns on disputes regarding the terms of carriage of non-local broadcast station programming, such as various cable TV networks, along with increasingly important digital distribution rights. I submit that the negotiations going on now could not have been imagined by the framers of the 1992 Cable Act.

My point here – and I have been consistent on this point throughout – is not to argue in favor of some regulatory "fix" or the other that tweaks the current regime to favor one party or the other. At the outset I spoke of the (hopefully) short-term "pain" being experienced by current TWC subscribers deprived of their CBS programming. But hopefully out of this experience, and similar "retrans" fights, there will be a long-term "gain" for consumers. This gain would come in the form of a realization that, in today's digital broadband Internet environment, with a competitive video marketplace, it is time to get rid of all the decades-old legacy video regulations that were put in place in an analog era when consumer choice was limited in a way not imaginable today.

Deregulation of the video marketplace, along the lines of the DeMint-Scalise "Next Generation Television Marketplace Act" introduced in the last Congress, is the ultimate solution to ensuring that consumer welfare is enhanced by negotiations between programming suppliers and program distributors in a truly free marketplace. With all the legacy regulatory backstops in place, what we're witnessing now is not what I'd call a free market negotiation.

For further reading on this point, see my July 25 blog immediately below, with still more links embedded therein for even further readings.

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Thursday, July 25, 2013

The CBS - TWC Dispute: Don't Be Fooled by Free Market "Negotiation" Claims

Today I have been reading bits and pieces about the "retrans dispute" between CBS and Time Warner Cable. These retransmission disputes have a way of turning nasty and leaving pay TV viewers -- such as Time Warner Cable's subscribers in this instance -- in the dark. 

And by "in the dark" I mean the pay TV subscribers are threatened with the loss of programming on their local TV station, or actually lose it, and they generally are in the dark as to what's behind the dispute.

Here's a good post on the Madery Ridge website that is useful in explaining what's behind the dispute. I don't mean to endorse every assertion and interpretation contained in the post, but it does shed light on the problematic nature of CBS's claims -- and the claims that are often made by the broadcast television networks in these retransmission disputes.

Even in the face of sharply rising retransmission fees paid to broadcasters by pay TV providers, I certainly don't want to presume to judge what the right "negotiated" price should be to resolve the TWC - CBS dispute -- in other words, how much TWC must pay to continue to carry CBS's broadcast programming. But, as I have said many times in the context of discussing similar retransmission disputes, please don't assume that what is taking place in LA is a "free market" negotiation as the broadcasters often claim. The broadcasters retain many legacy regulatory privileges -- adopted decades ago in a much different video marketplace environment -- that provide an overlay to the negotiations. These legacy regulations prevent the bargaining from being characterized as truly free market. That's why "negotiated" above is placed in quotes.

And the fact that broadcasters have obtained their spectrum for free is no small matter. In fact, it's a big deal in a world in which only 10% of American households still obtain their television programming free "over-the-air."

Along with other FSF scholars, I have written several pieces explaining why the "retrans negotiations" are not truly free market negotiations. If you need a refresher on this important point as you try to figure out the current TWC - CBS brouhaha, see here, here, and here.

  

Posted by Randolph J. May at 7:45 PM, July 25, 2013

FCC Report Reconfirms the Reality of the Video Market's Competitiveness

In the communications context, the word "disconnect" probably brings to mind what happens when a subscriber stops paying for their telephone or cable video service. Increasingly, however, the term has come to characterize the FCC's regulatory policy toward cable and video services.

On July 22, the FCC released its 15th Video Competition Report. Last year's Report confirmed what we already knew about the video market: namely, that it's innovative and competitive. The 15th Report reconfirms those conclusions. An updated swath of data compiled in the 15th Report points – yet again – to the proliferating video choices enjoyed by consumers.

But by bolstering the case for the video market's competitiveness, 15th Report data also magnifies the serious disconnect in the FCC's video policy. Much of the FCC's video regulations are based on 1990s analog-era monopolistic assumptions about cable "bottlenecks." Prior to the 15th Report it was already obvious that last-century rationales for extensive regulation had been rendered obsolete by innovation and competition in the video market. The latest data only restates the obvious: the disconnect – like a broken chain – between 1990s monopolistic assumptions and today's competitive video market conditions is growing.

 According to 2010 numbers contained in the 14th Report, 98.5% of all households – that is, 128.8 million households – had access to at least three multichannel video programming distributors (MVPDs). And 32.5% of households – 42.9 million – had access to at least four MVPDs. The 2011 numbers contained in the 15th Report show further improvements: 98.6% – 130.7 million households – had access to at least three MVPDs, and 35.3% – 46.8 million – had access to at least four.

Market share data can easily be overemphasized as an indicator of competitiveness, especially where markets are driven by rapid changes in technology, services, and consumer behavior. Yet, even in terms of market share, data cited in the 15th Report further further reinforces the video market's competitiveness. Between year-end 2010 and June 2012, "cable MVPDs lost market share, falling from 59.3 percent of all MVPD video subscribers at the end of 2010 to 57.4 percent at the end of 2011, and 55.7 percent at the end of June 2012." Meanwhile, direct broadcast satellite (DBS) market share increased from 33.1% in 2010, to an estimated 33.6% at the end of June 2012. And "telco" MVPD entrants served 6.9% of the market in 2010, increasing to 8.4% in 2011.

Also, the 14th Report called attention to the entry and growth of online video distributors (OVDs) as a potent source of value and competition. Data in the 15th Report further highlights the increasing popularity of OVD services with consumers:

SNL Kagan estimated that there were 26.6 million Internet-connected television households (i.e., accessed via an Internet-enabled game console, OVD set-top box, television set, or Blu-ray player), representing 22.8 percent of all television households, at the end of 2011, and estimated that by the end of 2012, the number would grow to 41.6 million, or 35.4 percent of television households.

Of course, traditional TV viewing far outweighs online video viewing. A cited study by Nielsen found that in the second quarter of 2012 Americans watched an average of nearly 32 hours per week of traditional TV and 2.5 hours of time-shifted TV, but watched approximately 4.5 hours per week of video using the Internet. Nonetheless, "SNL Kagan reports that the availability of large libraries of archival content and the availability of new content, coupled with the availability of broadband and an increasing number of Internet-connected devices, has enabled OVD substitution."

Further, the 14th Report acknowledged the ongoing replacement of analog systems with digital, rapid expansion of high-definition broadcasting and TV ownership, multi-casting, digital video recorder (DVR) options, video-on-demand functions, as well as TV-Everywhere and other mobility capabilities. The 15th Report reveals across-the-board increases in deployment, functionality, and adoption of such advanced video technologies. For instance, as of 2012, more than 74% of households have sets capable of receiving digital signals, including HD signals. Nearly 44% of households have DVRs. More than 5% of MVPD subscribers qualifying for TV-Everywhere access used it to view content in the month of September 2012. By year's end 2012, more than half the geographic footprints of the top eight cable operators had transitioned to all-digital video.

Of course, the 15th Report nowhere admits the effectively competitive state of the video market. While the statute doesn't expressly require any "effective competition" conclusion, such non-responsiveness to the evidence seems counterintuitive. Perhaps the FCC avoids any such conclusion out of fear it could be used in court to challenge any number of FCC legacy cable regulations.

Still, one can reach an "effective competition" conclusion through an admittedly abbreviated analysis supplied by the FCC itself. Consider today's nationwide market for video subscription services in light of the FCC's "competing provider test" for determining whether a local franchise area is effectively competitive. According to the test, effective competition exists if at least two unaffiliated MVPDs offer comparable video services to half of the area's households and the number of households subscribing to service other than the largest MVPD exceeds 15%.

Now recall that 98.6%, or 130.7 million households, had access to at least three MVPDs. Plus, 59.3% of households subscribe to cable, 33.6% subscribe to one of two DBS providers offering service nationwide, and 8.4% subscribe to a "telco" MVPD service. The nationwide MVPD market would pass the "competing provider test" for effective competition with flying colors. At the very least, it cuts cable bottleneck assumptions to pieces.

Ultimately, the underlying premises for video regulation need to be completely reexamined by Congress.  The legacy cable and satellite video regulatory apparatus needs to be dismantled. And First Amendment concerns with government regulation of video service providers' editorial and speech activities need to be respected. A market power framework that considers anticompetitive conduct and consumer harm could supply the analytical basis for a more targeted approach that reflects actual marketplace conditions.

A First Amendment-friendly, market-power approach to video regulation was recently sketched out by D.C. Circuit Judge Brett Kavanaugh in Comcast v. FCC (2013). At issue was an FCC order requiring Comcast to carry the Tennis Channel on a particular cable channel tier, pursuant to a statutory provision regarding program carriage agreements (Section 616). "In restricting the editorial discretion of video programming distributors," wrote Judge Kavanaugh in his concurring opinion, "the FCC cannot continue to implement a regulatory model premised on a 1990s snapshot of the cable market." Over the last sixteen years, Judge Kavanaugh explained, "the video programming market has changed dramatically, especially with the rapid growth of satellite and Internet providers," the result being that "neither Comcast nor any other video programming distributor possesses market power in the national video programming market." Judge Kavanaugh therefore concluded that "[u]nder the constitutional avoidance canon, those serious constitutional questions require we construe Section 616 to apply only when a video programming distributor possesses market power."

Until Congress replaces the legacy regulatory system, we face the unfortunate prospect of a still further disconnect between "a 1990s snapshot of the cable market" and actual competitive video market conditions. Expect future Video Competition Reports detailing innovative video services, competing business models, and changing consumer habits. And, absent a course change by the FCC, expect the agency, even in the face of abundant dynamic market indicators and pro-consumer data points, to continue avoiding the obvious about today's effectively competitive video market.

Time to Reconsider Reforming FCC Competition Reporting

On Friday, July 19, the FCC is expected to release its Fifteenth Video Competition Report in the course of its public meeting. I wrote about the Fourteenth Report in my Perspectives from FSF Scholars paper, "FCC's Video Report Reveals Disconnect Between Market's Effective Competition and Outdated Regulation." This new report should at least summarize more recent data on competitive developments in the video market.

The timeliness, scope, and frequency of FCC competition reports to Congress were all touched on during the U.S. House Subcommittee on Communications and Technology's hearing on "Improving FCC Process."

FSF President Randolph May provided testimony at that hearing. And his blog post, "FCC Regulatory Reform and Administrative Law," offers a further response to the hearing's discussions.

At the hearing, one of the discussion draft bills that Chairman Greg Walden called attention to a discussion draft bill that would consolidate the FCC's competition reports into a single, biennial "State of the Industry" report. In the 112th Congress, the House passed such a measure – the Consolidated Reporting Act of 2012 (H.R. 3310) – on a voice vote. Unfortunately, the Senate gave the legislation no consideration.

In my Perspectives paper, "Convergent Market Calls for Serious Intermodal Competition Assessments," I explained why I thought consolidated reporting legislation was ripe for reintroduction:

Combining disparate competition reports would structurally conduce to intermodal competition assessments. It should come as no surprise if the current system of separate FCC reporting on specific services results in largely silo-like analyses. That is what current law all but invites. A more comprehensive approach to digital age communications services – combined with a specific directive regarding intermodal competition assessment – could offer a better perspective on the competitive state of voice, video, audio, and data services as well as the substitutability of wireline, wireless, satellite, and other platforms. It could even shed light on the unnecessary and outdated regulatory burdens that now saddle communications services on a variety of platforms. Combined FCC reporting could also reduce the administrative burdens.

Combining future FCC reports is something that a June 25 GAO report also called attention to. And the forthcoming release of the FCC's Fifteenth Video Competition Report should likewise provide occasion to consider the benefits of reform.